Households have experienced a tighter income squeeze in recent years than during the 1990s recession

Published on Incomes and Inequality

Over the past two years, UK households have experienced slower income growth than in the aftermath of the early 1990s recession, and the weakest growth outside of recessions since records began in 1961, according to new Resolution Foundation’s annual Living Standards Audit published today (Wednesday).

Living Standards Audit 2019 explores the state of living standards across Britain as the next Prime Minister prepares to take office. It shows that he faces an urgent task of restoring decent rises in household incomes after an extended period of weakness which, for some low-income families, predated even the financial crisis.

The Audit estimates that typical household incomes have fallen by 0.5 per cent over the past two years (between 2016-17 and 2018-19) ­– even weaker than the 0.3 per cent growth between 1991 and 1993, when the economy was in and then recovering from recession.

This latest slowdown forms part of a wider stagnation in living standards since the financial crisis, caused primarily by a severe curtailing of the traditional driver of income growth – rising productivity. The report notes that rising output per hour accounted for two-thirds of overall economic growth before the great financial crash, but just 22 per cent of growth since then.

The Audit shows that, in the absence of rising productivity, Britain has resorted to other means to boost household incomes.

Looking at the economy as a whole, the Audit finds that population growth has accounted for over-two thirds (69 per cent) of overall economic growth since 2007, compared to just 15 per cent pre-crisis.

Households have boosted their incomes by working more – employment is 3 percentage points higher than in 2007 – and curtailing their leisure time – the average number of hours worked has remained unchanged at 32 hours per week since 2007, having fallen by an average of one hour every four years over the past century.

However, the Foundation warns that households may be running out of road when it comes to using these approaches to boost their incomes. It notes that the UK’s employment rate is already at its highest level since the Second World War, and that the jobs gap to top performing countries (like Denmark and Japan) has almost entirely closed (from 5.5 percentage points in 2006, to just 0.7 percentage points in 2018).

The Foundation says that the incoming Prime Minister should therefore learn from history to see how families have traditionally got richer over time. It says that as well as boosting earnings via rising productivity, the new PM should recognise that rising employment and earnings for women has been a key driver of living standards improvements.

The Audit finds that despite male employment income representing the largest single element of working age household income, men and women have contributed in roughly equal measure to income growth over the past 25 years. Female employment income has grown by £6,100 (or 70 per cent) since 1995, while male employment income has grown by £7,100 (or 44 per cent).

The Foundation says that just as the expansion of paid maternity leave and free childcare has supported family incomes over the past 25 years, a new set of policies will be needed in the coming years, such as reforming Universal Credit to better support second earners in households to work.

Ultimately however, the Foundation says that there is no substitute for faster productivity growth as the route to higher living standards. Restoring this – via greater investment in skills and capital across the UK, and resolving Brexit uncertainty – should be a top priority for the next Prime Minister.

Adam Corlett, Senior Economic Analyst at the Resolution Foundation, said:

“Over the past two years, UK households have experienced a near stagnation in living standards, even worse than the income hit experienced during the early 1990s recession.

“Restoring decent levels of household growth is therefore one of the most critical challenges facing the incoming Prime Minister.

“The living standards history of the past 25 years tells us that there are two ways broad ways that families have traditionally got richer over time – higher pay off the back of rising productivity, and supporting more women into work.

“After an unprecedented income squeeze over the past decade, and a living standards outlook that includes child poverty rising to record levels, an economic approach that supports higher incomes for all households must be the top domestic priority for the incoming PM.”